What price a top state school?

The best things in life may be free, but buying a house in the vicinity of the best things in life is expensive

How much do parents value a safe environment, green spaces and a good education for their children? Such things are priceless – except that, of course, they are not. The best things in life may be free, but buying a house in the vicinity of the best things in life is expensive.

Economic researchers use house prices like a movie jewel-thief uses an aerosol spray. The aerosol isn’t important by itself, but it reveals the otherwise invisible laser beams that will trigger the alarm. The house prices aren’t necessarily of much direct interest, but indirectly they reveal our willingness to pay for anything from a neighbourhood free of known sex offenders to the more familiar example of a popular school.

In principle this is easy. Compare the market price of two otherwise identical houses, one of which enjoys the amenity in question (a nice view, a quiet street, access to an excellent school) while the other does not. In practice, houses are rarely identical, and all sorts of valuable amenities from good schools to good neighbours to low crime are likely to be jumbled up together.

Researchers have relied on a variety of statistical techniques to get round this problem. At first they used what are called “control variables”, a mathematical attempt to adjust for the fact that a proper like-for-like comparison is impossible. More recently they have focused on administrative boundaries, where one side of a street is in a school’s catchment area while the other side is not.

“A link between better schools and higher house prices is one of the most stable empirical regularities worldwide,” writes the economist Steve Gibbons in Centrepiece, a magazine published by the LSE’s Centre for Economic Performance. His colleague Stephen Machin has published a more academic review of the literature, reaching much the same conclusion: the ability to send your children to one of the best schools rather than one of the worst will add 15 to 20 per cent to the value of your home. (Internationally, estimates range from about 5 per cent to 40 per cent.)

Relative to private school this is pretty good value: it corresponds to around £20,000 or so. [EDIT: Apologies, this should have been £28,000, with UK average house price of £160,000. Not sure what I was thinking. Then again, interest rates of 5 per cent are on the high side so the £1000 a year figure remains in the right ballpark. Thanks to all who pointed out the error.] Since one would presumably get this money back eventually, when selling the house, the real cost is just the extra interest on a larger mortgage (or the foregone opportunity to earn interest on savings). At interest rates of 5 per cent, that is £1,000 a year for the right to send every child in your family to a nice school, an order of magnitude less than the cost of privately schooling a single child.

One obvious question is what parents actually think they’re paying for here – the quality of the schooling, or the chance to choose their child’s peer group? The answer seems to be both, in roughly equal measure. School regulators focus on “valued added” measures – the underlying quality of what the school provides – but parents are probably right to care about who is in their child’s peer group, too.

What conclusions should we draw? The first is that while the chattering classes talk endlessly about schools and school admissions, willingness to pay to live near a good school is smaller than I would have expected. No doubt there is a lot of variation here: some people don’t care at all and others care desperately. Still, it is surprising that willingness to pay is so low.

The second conclusion is that while £1,000 a year isn’t an enormous amount, it’s a large sum relative to how much we spend on state schooling – about £6,000 per child in England. More to the point, of that £1,000-a -year willingness to pay for good schools, the school system receives not a penny. There must be a better way.

I too am surprised that it’s as little as £20,000 but as a national average, it’s probably double that in the South East? This equates to roughly three years of private fees. Better yet private school fees are paid from net income whereas the additional house value is paid back to you free of Capital Gains (Principal Primary Residence exemption).

However, your analysis assumes an individual has unlimited borrowing potential. Here in Surrey I can afford a four double bedroom detached house, but state secondary schools appear to be averagely good. Over in Kent near a top state school I can only afford three beds, and probably only a semi. This means my children’s educational needs must be traded off against a domestic standard of living!

Ironically, due to the current financial climate and tight bank borrowing it is likely that many moderately affluent families with medium sized mortgages can find it easier to pay a 5 figure sum from income to cover school fees, than convince a bank to advance them enough to buy a comparable home.

A further complication is that most grandparents, who can afford to do so, would more willingly pay for private education for grandchild than the cost of a more luxurious pad for their children!

Like much in this world, it’s likely not as simple as it seems at face value.

Another complication to these calculations is that in some regions administrative boundaries are irrelevant. For example, Alistair mentions Surrey – admissions there are strictly by distance, so if you’re right near the boundary your chances of admission to a good school are very low (because most likely another child lives closer) and consequently it wouldn’t be surprising if that didn’t add much value.

I would also be interested in the rental market as this might show a more “dynamic” result. As rental “events” are more common and less likely to reflect special sales of for example under-pricing a property for sale to a son or daughter.

I was lucky enough to live in the catchment area of a top state 6th form (although not by design). It was so good that about a third of my classmates had switched from private secondary schools ranging from £10-20k a year.

As for the benefits, it stood me in good stead when I had my interview for Oxbridge. I remember at lunch there were eight of us when one said, “So we all went to private schools here right?” to which I was the only one not to have. I was then informed that “Well, you know Oxbridge favours private schools right?”.

Whilst factually incorrect I can still imagine the experience could be daunting for many. However, I was able to smile and tell them that my school has a 1/2 success rate for Oxbridge (twice the national average of 1/4) and that unless they went to Westminster, my school sends more kids to Oxbridge every year than theirs.

I took some satisfaction when I matriculated that I was the only one out of the eight to get in.

There are several problems with questions like this. Firstly, it assumes all countries have the same system while using my aspect, a Budapest example. State high schools pick students based on merit (academic results from primary school plus entry tests) and as public transport is quite good from all districts a child can travel to a ‘good’ school (even from the agglomeration of Budapest) in less than an hour, thus the issue of house prices including a cost for a better school has basically diminished (not to mention that state funded schools are better than the private/foundation schools). Of course you will find something similar at primary school level although there are smaller differences at that level.

Second, what about preferences. With strict class segregation the families who find a good state school important are in a limited number. Upper classes will choose private education, lower classes don’t care then it becomes obvious that the premium for being in vicinity of a good school becomes relatively small.

Its interesting to see the difference in the definition of “good neighborhood”. In India, apart from all the above mentioned (though people might be flexible for a few of those), the general population also looks at distance from nearest highway / business center, proximity to malls and airports etc. Another factor people take into account is the level they expect the house prices to reach. People even adjust their rents with that value. Somehow traveling long distances for school isn’t a major concern. In places like New Delhi children can travel for more than an hour sometimes.

Tim, you under estimate the size of the school effect, and the cost to parents. 1. The effect: The house price will be determined by all purchasers, many of whom will not have school age children at the point of purchase, in effect subsidizing the parents. 2. The cost: The (second!) average price you use is not the average price for family homes parents will be buying, which will be higher. 3. 5% is not on the high side in historic terms for an interest rate – school for 2 kids can last 15-20 years, you need a reasonable long term rate. 4. Parents have to find the monthly cost of repaying capital and interest – I.e the full extra mortgage cost. Often parents don’t get the money back. Their kids do when they’re dead. Parents just live in a more expensive house than they need to when the kids have left. (Moving costs mean they can’t just move down the road and cash in).

The only way to remove this premium (and therefore inequality of opportunity) is to have a completely random school allocation. Parents could apply for any school and places allocated by random ballot. A more market driven approach would be asking parents to bid for a place and the highest bids get the places, and funds shared equally across all schools. This would move the premium from property to the education system

This is an argument for a land value tax. If you buy a house in a better location, the value of the site is higher. By paying tax on the site value, you pay the community and state for all those amenities they provide which make the site valuable.